Shareholder Value Maximisation: Are We Living In The End Times?

11 May 2018 | World Views | AJ Cilliers

If modern finance theory can be said to have a single goal, that goal would be the maximisation of shareholder value.  This is obviously a great idea if you happen to be a shareholder, but according to its proponents, it is also very good for the rest of us.

Copeland, Koller and Murrin, corporate finance gurus at McKinsey and Company, probably express this notion as well as anybody.  In their classic text on measuring and managing the value of companies, they declare with almost missionary zeal: "Beneath the techniques and methods we present lies the belief that maximising shareholder value is, or ought to be, the fundamental goal of all businesses."

They go on to explain why this should be the case.  Although they acknowledge that European and Japanese companies, for example, take a broader stakeholder view of corporate responsibility, Copeland et al argue that "A US-style system based on maximising shareholder value, accompanied by broad ownership of debt and equity and an open market for corporate control, appears to be linked with a higher standard of living, greater overall productivity and competitiveness, and a better functioning equity market."

Copeland and his colleagues then go on to illustrate the impressive record that shareholder value maximisation (SVM) has in driving economic growth, and in particular, economic growth per capita.  It seems that SVM does in fact live up to the claims made for it.  And in an evolutionary, survival-of-the-fittest kind of way, SVM is destined to thrive. 

Copeland et al explain it like this: "If countries whose economic systems are not based on maximising shareholder value, give investors lower returns on capital than those who do, they will slowly be starved of capital as capital markets continue to globalise, falling further and further behind in global competition.  A value-based system becomes ever more important as capital becomes ever more mobile."

It is hard to argue against this proposition, particularly if you recognise that the macro implication of SVM is global economic growth.  Economic growth is good, and economic growth per capita is good for individuals, as we all become steadily better off.  Well, perhaps not all of us, but if on average the world is getting richer, the rich will be better placed to help the poor.  Or so the argument goes.

Why then might SVM be under threat?  To understand this, we need to examine a number of fundamental problems inherent in the capitalist system.  We’ve managed to blind ourselves to these realities for centuries, but slowly the mists of delusion are clearing and we’re faced with a rather bleak landscape.

In Sapiens, a brilliant and thought-provoking history of the past 70,000 years of human history, Yuval Harari explains that capitalism introduced the ’sacred commandment’ that: "The profits of production must be reinvested in increasing production."  Harari notes that this sounds almost trivial, yet throughout history it was alien to most people.

In premodern times, people believed that the level of production was more or less constant, and that there was no reason, therefore, to reinvest profits.  As a result, medieval noblemen spent their profits on tournaments, banquets, palaces and wars, and on building monumental cathedrals.  Few of them tried to increase the output of their manors, or to look for new markets for their produce.

In the modern era the medieval noblemen have been replaced by corporate leaders, whose prime objective is investing to increase productivity.  And it’s not just corporate citizens who are on the lookout for investment opportunities.  As members of the Sharenet community know, many ordinary citizens regularly debate the wisdom of investing their money in equities, bonds or property as they strive to increase their personal wealth.

Governments are also growth focused.  They look to increase their future tax revenues by incentivising new industries or investing in education, so that smart people can develop high-tech industries in the future.  And taxing the additional profits from these industries, leads to ever-rising tax income for the government.

As Harari points out, capitalism gradually became more than just an economic doctrine: "It now encompasses an ethic - a set of teachings about how people should behave, educate their children and even think.  Its principal tenet is that economic growth is the supreme good, or at least a proxy for the supreme good, because justice, freedom and even happiness all depend on economic growth."

And herein lies the crux of the problem.  At the heart of the capitalist philosophy is the unspoken promise that more will make us happier.  More growth equals more profits; more profits means more money for citizens; more money will buy more stuff, and more stuff will give us greater levels of happiness.

But will it?  Back in the 1960s, psychologist Carl Jung pointed out that modern society was selling its citizens a lie.  We were told to work hard at school, because then we could get to university.  We should work even harder at university, because a good degree would get us a good job.  And a good job meant a good income, so that we could buy a nice house and a nice car and send our kids to good schools.  And this would make us happy.  Except, unfortunately, that it doesn’t.

This realisation is very important, but before we explore it in more detail, let’s get back to Harari for a moment.  He points out that the obsessive focus on economic growth has had an important influence on the development of modern science, because science is generally funded by either governments or private businesses.  When these institutions consider investing in a particular scientific project, the first questions are whether the project will lead to increased profits, or increased economic growth.  As a result, it is the advance of science and technology that has allowed us to keep growing our global economies.

There is a supreme irony in this truth.  It is clearly illustrated by a reminder that Bill Gates issued in an interview just a few weeks ago.  He said, in essence, that due to advances in robotics, computers, and artificial intelligence, most work in the nearby future will not be done by humans.  "We are going to have to give up the religion of work," Gates noted, "and find meaning in other ways."

Futurists believe that about one in three of us will have a formal job, with the rest of us depending essentially on a ‘social dividend’ or hand-out from the government.  Private investment may not even exist, and shareholder value maximisation might be a concept that is consigned to the annals of finance history.  At worst, it may be highlighted as one of the toxic notions of capitalism that took us to the edge of the abyss.

This sounds desperately pessimistic, and of course things need not work out this way.  But what Harari has highlighted, is that there are two things that we humans haven’t given enough thought to.  They are: What do we want from life, and what will make us happy?

Not long ago, Bill Gates and the late Stephen Hawking warned that the development of artificial intelligence by scientists could spell the end of the human race.  Robots and computers could become hugely intelligent, and in a dystopian nightmare, could overthrow humanity and take over the world.  The response from a scientist in the AI field was chilling.  He noted calmly that we can’t stop now; humans must continue to pursue scientific knowledge as it would be an intellectual betrayal to stop.

Let me end with a warning from Yuval Harari: “Despite the astonishing things that humans are capable of doing, we remain unsure of our goals and we seem to be as discontented as ever.  We have advanced from canoes to galleys to steamships to space shuttles – but nobody knows where we’re going.  We are self-made gods, more powerful than ever before, but with very little idea what to do with that power.

"Is there anything more dangerous than dissatisfied and irresponsible gods, who don’t know what they want?"


Valuation: Measuring and Managing the Value of Companies.  By Tom Copeland, Tim Koller and Jack Murrin.  Wiley Publishers.

Sapiens: A Brief History of Humankind.  By Yuval Noah Harari.  Published by Vintage Books, London.



AJ Cillers

AJ is an academic and a freelance financial journalist who has written for Sharenet for some 15 years. He spent 25 years as an accountant and financial manager in various South African companies before moving into academia. He has a broad range of interests, including all aspects of business and stock market investing. Apart from a bachelor’s degree in Accounting, AJ holds a Master’s degree in Financial Management. He is also a Fellow of the Chartered Institute of Management Accountants.

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